Medicare Wages and Tips (W-2)

Filling out a W-2 form is important, we all know that. But just because it’s important does not mean it’s supposed to be difficult to understand. Wouldn’t it be empowering if you understand its content? We’re here to help you out with that. In this article, we will focus on a specific section of a W-2 form. 

What are Medicare Wages and Tips (W-2)? 

The “Medicare wages and tips” portion is box number 5 on the W-2 form. It indicates the total wages and tips that are subject to Medicare tax withholding. The number that is indicated in this Medicare wages and tips on box number 5 is typically the same as the “wages, tips, other compensation” section. 

Keep in mind that there is no wage base limit or cap for Medicare tax because it is based on a hundred percent of the earnings of the employee. All employees need to pay Medicare tax no matter how much they earn. The specific amount that a worker is taxed will depend on their annual earnings. But there are specific pre-tax deductions that are exempt from Social Security and Medicare taxes. Examples are 401(k) retirement contributions and life insurance premiums. 

What is the current Medicare tax rate? 

Medicare taxes are paid by both the employer and employee. The present rate in 2021 is 1.45% for each. Again, the rate will depend on the annual income of the employee. 

To clarify, kindly check the Medicare tax rate depending on which category you fall under: 

• Single taxpayers: 1.45% of the first $200,000 of gross wages
• Married taxpayers who are filing jointly: 1.45% of the first $250,000 of gross wages
• Married taxpayers who are filing separately: 1.45% of the first $125,000 of gross wages

Please note that there is an additional 0.9% tax on wages above $200,000 for individuals and $250,000 for married couples who are filing jointly. This means that, for those whose earnings are above the given threshold, their Medicare tax withholding will be 2.35% which is 1.45% plus the additional 0.9%. Employers are not required to give contributions to this additional tax from their end. 

A tip to both employers and employees, always stay updated on the current tax rates. 

Who is required to pay Medicare taxes? 

Generally, you are required to pay Medicare taxes if you work in the United States. However, non-resident aliens who are holders of H-2, H-2A, J-, and Q-visas may be exempt from Medicare taxes provided that they meet all the exemption requirements set by the Internal Revenue Service (IRS). 

Where do Medicare taxes go?

Medicare taxes that are collected from workers and employers are used to fund the Medicare program. This is a program that helps Americans older than 65 with disabilities by helping with the costs of the following:

• Hospital insurance: hospital stays, hospice care, nursing facilities, and some home health care;
• Medical insurance: doctors’ fees, outpatient care, preventive services, and medical supplies;
• Prescription drug coverage: includes vaccines and other shots recommended by doctors;

Additionally, the money collected from the additional Medicare taxes funds the Affordable Care Act (Obamacare). It aims to provide health insurance to Americans who are uninsured because of economic challenges. 

I am an employer. What are my responsibilities related to Medicare taxes?

As an employer, you play an essential role in fulfilling Medicare tax responsibilities. To begin with, you are responsible for properly withholding Medicare taxes from the wages of your employees. Do not forget to contribute your share as well. Again, you are required to match the 1.45% contribution of employees. If your employee is subject to the additional Medicare tax of 0.9%, you won’t need to match this additional portion. 

Deposit the funds withheld from your employees’ paychecks in an authorized financial institution. Finally, employers also take charge of filing payroll tax returns and preparing reconciliation reports. 

These standards are set for a reason. Be sure to comply as required so you will not have to deal with any sanctions.